What's the secret to max #LPs in a venture fund?
Open parallel funds!
Limits:
• 250 LPs if venture fund <$10m—§3(c)(1)(C)
• 2,000 LPs if all Qualified Purchasers—§3(c)(7)
• ∞ foreign LPs—Reg S.
A legal framework for forming parallel funds.
1/x 🧵
Open parallel funds!
Limits:
• 250 LPs if venture fund <$10m—§3(c)(1)(C)
• 2,000 LPs if all Qualified Purchasers—§3(c)(7)
• ∞ foreign LPs—Reg S.
A legal framework for forming parallel funds.
1/x 🧵
2/ But why are there even limits to raising a fund?
• Three laws makeup 80%+ of venture fund law:
—Securities Act
—Investment Company Act ("ICA")
—Investment Advisers Act
The ICA is one of the three backbones of venture law and the reason a fund has limits.
• 100, 250, or 2k
• Three laws makeup 80%+ of venture fund law:
—Securities Act
—Investment Company Act ("ICA")
—Investment Advisers Act
The ICA is one of the three backbones of venture law and the reason a fund has limits.
• 100, 250, or 2k
3/ The REAL limit is not the # of LPs but raising from a pool of qualified purchasers (QPs).
• QPs are ultra high net worth individuals ($5m investments), family offices ($5m) & institutionals ($25m)
Good luck finding 2,000 of those folks to invest in your fund!
Another way?
• QPs are ultra high net worth individuals ($5m investments), family offices ($5m) & institutionals ($25m)
Good luck finding 2,000 of those folks to invest in your fund!
Another way?
4/ Yes, under Regulation S
This is the Touche Remnant Doctrine:
1) Form an Offshore Fund
2) Only US investors count against 100 LP limits
3) But here's the real secret:
—If every investor in the Offshore Fund is QP or Non-US LPs, you get ∞
(Non-US LPs don't need to be QPs)
This is the Touche Remnant Doctrine:
1) Form an Offshore Fund
2) Only US investors count against 100 LP limits
3) But here's the real secret:
—If every investor in the Offshore Fund is QP or Non-US LPs, you get ∞
(Non-US LPs don't need to be QPs)
5/ So why don't funds do this more often?
First, it's a hassle; impractical unless raising a large fund.
Second, regulatory limits come quick as a non-venture fund.
Venture funds can raise ∞ $, but if your focus is crypto, real estate, etc. you cap out at $150m FMV of funds
First, it's a hassle; impractical unless raising a large fund.
Second, regulatory limits come quick as a non-venture fund.
Venture funds can raise ∞ $, but if your focus is crypto, real estate, etc. you cap out at $150m FMV of funds
6/ However, as a private fund, opening an offshore fund creates an additional problem: Integration.
Integration is a legal framework the SEC uses to prevent funds from raising more than one fund to get around the rules.
I'll copy + paste the framework as it's a bit verbose.
Integration is a legal framework the SEC uses to prevent funds from raising more than one fund to get around the rules.
I'll copy + paste the framework as it's a bit verbose.
7/ So, what's the best strategy for keeping your funds from being integrated?
It's the same strategy Weekend Fund uses (see link):
• Keep your 3(c)(1) fund SEPARATE from your 3(c)(7) fund(s)
But how? Do you really need 2 sig blocks on every deal?
It's the same strategy Weekend Fund uses (see link):
• Keep your 3(c)(1) fund SEPARATE from your 3(c)(7) fund(s)
But how? Do you really need 2 sig blocks on every deal?
https://twitter.com/rrhoover/status/1408070695699902471?s=20
8/ No—Parallel Funds can operate in two ways:
• Traditionally, funds sign two signature blocks for each investment deal (co-invest)
• But another approach is to use a 'nominee agreement' where ONE fund is the investing lead.
Eg: Fund I holds Fund I-A’s shares, as nominee
• Traditionally, funds sign two signature blocks for each investment deal (co-invest)
• But another approach is to use a 'nominee agreement' where ONE fund is the investing lead.
Eg: Fund I holds Fund I-A’s shares, as nominee
9/ Wouldn't it just be easier to raise a fund with QPs only?
Yes! Which is why @a16z, @sequoia & large funds will not accept checks from retail investors.
Paradoxically (or rather, by design) the venture ecosystem does NOT WANT small investors. To work, it NEEDS institutions.
Yes! Which is why @a16z, @sequoia & large funds will not accept checks from retail investors.
Paradoxically (or rather, by design) the venture ecosystem does NOT WANT small investors. To work, it NEEDS institutions.
10/ Two other issues w\ the model:
(a) Foreign securities laws must still be complied with, which often bring LP limits (so not unlimited)
(b) Offshore fund is taxed as C corp. Creates a tax problem unless you draft around it (eg, Master/Feeder).
H/t @VCFundLawyer, @mmealling
(a) Foreign securities laws must still be complied with, which often bring LP limits (so not unlimited)
(b) Offshore fund is taxed as C corp. Creates a tax problem unless you draft around it (eg, Master/Feeder).
H/t @VCFundLawyer, @mmealling
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